1. CBEC scraps norms, brings relief to EOUs, STPs

CBEC scraps norms, brings relief to EOUs, STPs

Removing the customs warehousing requirement will have a positive impact in reducing the cost of compliance, but it will require a good follow through and adoption by all

By: | Updated: September 8, 2016 7:31 AM
Cumulative export of goods and services by EOU and STP units adds up to more than  billion and contributes around 15% to India’s export of goods and services. (Reuters) Cumulative export of goods and services by EOU and STP units adds up to more than billion and contributes around 15% to India’s export of goods and services. (Reuters)

On July 29, the Central Board of Excise and Customs (CBEC) came out with notifications and circular 35/2016 removing the requirement of customs warehousing and bonding of duty-free goods for export-oriented units (EOU), software technology parks (STP) and electronic hardware technology parks (EHTP). This move will benefit around 2,000 EOUs and more than 3,000 STP units operating in India. Cumulative export of goods and services by EOU and STP units adds up to more than $60 billion and contributes around 15% to India’s export of goods and services. Removing the customs warehousing requirement will have a positive impact in reducing the cost of compliance for sizeable business community dealing with export of goods and services.

The change and its constructive consequence

The change is far-reaching; however, the benefits of change will play out very differently for service exporting STP units and merchandise exporting EOUs. STP units will potentially realise freedom from excise-related compliances of obtaining central excise registration, manufacturing under bond licence from customs and filing ER2, though technically the EOU will never be involved in manufacturing of goods. STP units, being exporters of software and services, were for ages operating under the hangover of manufacturing-related regulations, which never made sense, but nevertheless continued because of a change-averse government. STP units and services exporters would deeply appreciate the change for the better.

EOUs will also be benefited to the extent that redundancy of compliances under relevant customs notification and customs warehousing regulations has been cut down.

EOU, STP and EHTP units will no longer be required to file bond bill of entry and maintain records related to customs warehousing and bonds for posterity. Till date, burdensome procedures required the units to maintain records of capital goods imports for as many years as they continued to be in existence. The disconnect between customs compliance record-keeping and asset control processes in the companies often resulted in companies being required to pay customs duty with interest even in cases where capital goods would have become technologically-redundant.

Going forward, at the time of import, the importer would have to file bill of entry for home consumption; though accountability will continue to ensure that duty-free goods are used for the stated purpose, failing which duty and interest will become payable.

Driver for change—ease of doing business

Driver for the above change is the government’s single-minded pursuit of improving India’s global ranking in the ease-of-doing-business index and to position India as the preferred place of doing business for global organisations.

It seems that the doctrine of ‘ease of doing business’ has taken the place of the proverbial North Star. It will continue to guide the process of rationalisation of government policy, action and administration.

Method of change

The simplicity of the logic of cutting through duplicity of controls—redundancy of duplicity of customs notification 52/2003 and customs warehousing related controls—is the most powerful aspect of the way change has been sold to the government and also communicated in the circular. The circular goes on to state that “in case of the above-referred units, the need for duty deferment is obviated as the goods procured by them are exempt from duties of customs, under Notification 52/2003-Customs.”

Through a sharp, swift and simple stroke of argument, the circular passes a strong stricture on the legacy of such burdensome requirements being enforced on export-oriented units for the past few decades. Hopefully, such swift and bold moves will become the trend for re-looking at redundant regulatory controls.

It is interesting to observe the forced sunset clause in the circular, which states that “as a consequence, these units shall stand delicensed as warehouses under Customs Act, 1962, with effect from 13th August, 2016.” As the shelf life of secondary legislation is limited, the Tax Administration Reform Commission (TARC), which submitted its report to the finance minister in 2014, had recommended a one-time review of all the tax administrative rules, regulations, notifications, circular etc, to evaluate what is relevant and, hence, should survive and force a sunset on the rest. It seems that CBEC is selectively and constructively adopting the recommendation of TARC.

However, such a forced sunset clause does not play out very well on the ground and the benefit of such changes are evident only in due course of time. It has been observed that CBEC came up with similar sunset timelines in the case of special valuation branch (SVB) related procedure, dealing with customs valuation in case of related-party transaction. Full benefits of it are yet to be realised by the potential beneficiaries and it is told that CBEC has, recently, organised a meeting with top officials—commissioners and additional commissioners—of respective SVB jurisdictions at the North Block, on July 27, to try and iron out the differences so that the industry can enjoy the well-intentioned benefit from the government’s constructive change initiative.

Challenge and the way forward

Benefits of EOU and STP units flow through a complex maze of benefits under the foreign trade policy, various state VAT legislations, CST, central excise legislation and service tax regulation. The current change has only touched upon the customs notification 52/2003. For the full benefit of the spirit of ease of doing business to play out, all other legislations would be required to adapt to the change in spirit of governing EOU and STP units. The ministry of commerce should quickly lap up the change and drive it to its logical end. Specifically, EOU and STP units do claim central excise benefit on duty-free, local procurements, hence the corresponding central excise notification allowing benefit of duty for domestic procurement will also require a change.

A change of this magnitude requires a special focus and attention to transitional provisions—as to how would the processes flow once the goods are considered ‘deemed de-bonded’ after August 13. Field formations of CBEC, especially central excise jurisdictions responsible for administrative control of the units, may face practical challenge in ensuring smooth transition to the new era for EOU, STP administration.

Also, EOU and STP units will have to undertake mammoth efforts to reconcile, clear and close the past while start reporting in the new format provided in the circular.

In our view, the ultimate test of any change is the positive user experience it creates for its potential beneficiaries. Industry will wait and watch the outcome of this change for which the die has been cast by CBEC. It’s a great move from CBEC, but it will require a good follow through and adoption by all the stakeholders in order to be able to deliver on the promise.

The author is partner, BMR & Associates LLP. Views are personal

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